Question

Discuss the difference between trade deficit and trade surplus. How does the exchange rate affect trade?

Answer 1

Based on the cost of the imports and exports of a country, it can be termed as a trade deficit ot trade surplus nation.

If the net exports exceed the net imports cost then the nation is said to be in trade surplus.

If the net imports exceed the net exports cost then the nation is said to be in a trade deficit.

Exchange rate affects the trade since the country buying the products has to convert their own currency to the importer's currency in order to carry out transaction. So when the exchange rate of a nation 1 is high compared to nation 2 this means that the people in nation 2 will easily be able to import goods from nation 1. The imports to nation 2 increases. If the value of nation 1 currency is high then the poeple in the nation 2 will have to pay higher rate for the imports and hence the imports to nation2 reduces.